Question 1

A decrease in the domestic interest rate causes the demand for domestic assets to ________ and the domestic currency to ________, everything else held constant.

Accepted Answer

A)  increase; appreciate 
B)  increase; depreciate 
C)  decrease; appreciate 
D)  decrease; depreciate

Question 2

________ in the expected future domestic exchange rate causes the demand for domestic assets to shift to the ________ and the domestic currency to appreciate, everything else held constant.

Accepted Answer

A)  An increase; right 
B)  An increase; left 
C)  A decrease; right 
D)  A decrease; left

Question 3

________ in the expected future domestic exchange rate causes the demand for domestic assets to shift to the left and the domestic currency to ________, everything else held constant.

Accepted Answer

A)  An increase; appreciate 
B)  An increase; depreciate 
C)  A decrease; appreciate 
D)  A decrease; depreciate

Question 4

If, in retaliation for "unfair" trade practices, the Canadian government imposes a 30 percent tariff on Japanese TV's, but at the same time, Canadian demand for Japanese goods increases, then, in the long run, ________, everything else held constant.

Accepted Answer

A)  the Japanese yen should appreciate relative to the Canadian dollar 
B)  the Japanese yen should depreciate relative to the Canadian dollar 
C)  there is no effect on the Japanese yen relative to the Canadian dollar 
D)  the Japanese yen could appreciate, depreciate or remain constant relative to the Canadian dollar

Question 5

________ in the foreign interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to depreciate, everything else held constant.

Accepted Answer

A)  An increase; right 
B)  An increase; left 
C)  A decrease; right 
D)  A decrease; left

Question 6

The Brexit vote in June 2016 resulted in higher expected trade barriers. The relative expected return on British (pound) assets therefore ________ and so the quantity demanded of pound assets ________ at any given exchange rate, shifting the demand curve for pound assets to the ________.

Accepted Answer

A)  fell; declined; left 
B)  fell; increased; right 
C)  fell; declined; right 
D)  rose; declined; left 
E)  rose; increased; left

Question 7

The theory of asset demand suggests that the most important factor affecting the demand for domestic and foreign assets is the ________ on these assets relative to one another.

Accepted Answer

A)  interest rate 
B)  risk 
C)  expected return 
D)  liquidity

Question 8

________ in the domestic interest rate causes the demand for domestic assets to increase and the domestic currency to ________, everything else held constant.

Accepted Answer

A)  An increase; appreciate 
B)  An increase; depreciate 
C)  A decrease; appreciate 
D)  A decrease; depreciate

Question 9

________ in the expected future domestic exchange rate causes the demand for domestic assets to decrease and the domestic currency to ________, everything else held constant.

Accepted Answer

A)  An increase; appreciate 
B)  An increase; depreciate 
C)  A decrease; appreciate 
D)  A decrease; depreciate

Question 10

The theory of purchasing power parity states that exchange rates between any two currencies will adjust to reflect changes in ________.

Accepted Answer

A)  the trade balances of the two countries 
B)  the current account balances of the two countries 
C)  fiscal policies of the two countries 
D)  the price levels of the two countries

Question 11

An increase in the foreign interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to ________, everything else held constant.

Accepted Answer

A)  right; appreciate 
B)  right; depreciate 
C)  left; appreciate 
D)  left; depreciate

Question 12

________ in the expected future domestic exchange rate causes the demand for domestic assets to ________ and the domestic currency to appreciate, everything else held constant.

Accepted Answer

A)  An increase; increase 
B)  An increase; decrease 
C)  A decrease; increase 
D)  A decrease; decrease

Question 13

If the Canadian dollar appreciates from 1.25 Swiss franc per Canadian dollar to 1.5 francs per dollar, then the franc depreciates from ________ Canadian dollars per franc to ________ Canadian dollars per franc.

Accepted Answer

A)  0.80; 0.67 
B)  0.67; 0.80 
C)  0.50; 0.33 
D)  0.33; 0.50

Question 14

Exchange rates are determined in ________.

Accepted Answer

A)  the money market 
B)  the foreign exchange market 
C)  the stock market 
D)  the capital market

Question 15

A decrease in the domestic interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to ________, everything else held constant.

Accepted Answer

A)  right; appreciate 
B)  right; depreciate 
C)  left; appreciate 
D)  left; depreciate

Question 16

Higher tariffs and quotas cause a country's currency to ________ in the ________ run, everything else held constant.

Accepted Answer

A)  depreciate; short 
B)  appreciate; short 
C)  depreciate; long 
D)  appreciate; long

Question 17

An increase in the expected future domestic exchange rate causes the demand for domestic assets to ________ and the domestic currency to ________, everything else held constant.

Accepted Answer

A)  increase; appreciate 
B)  increase; depreciate 
C)  decrease; appreciate 
D)  decrease; depreciate

Question 18

When Canadians or foreigners expect the return on dollar assets to be high relative to the return on foreign assets, there is a ________ demand for dollar assets and a correspondingly ________ demand for foreign assets.

Accepted Answer

A)  higher; higher 
B)  higher; lower 
C)  lower; higher 
D)  lower; lower

Question 19

When Canadians or foreigners expect the return on ________ assets to be high relative to the return on ________ assets, there is a higher demand for dollar assets and a correspondingly lower demand for foreign assets.

Accepted Answer

A)  dollar; dollar 
B)  dollar; foreign 
C)  foreign; dollar 
D)  foreign; foreign

Question 20

Everything else held constant, if a factor decreases the demand for ________ goods relative to ________ goods, the domestic currency will depreciate.

Accepted Answer

A)  foreign; domestic 
B)  foreign; foreign 
C)  domestic; domestic 
D)  domestic; foreign

Exam 18: The Foreign Exchange Market

A decrease in the domestic interest rate causes the demand for domestic assets to and the domestic currency to , everything else held constant.

in the expected future domestic exchange rate causes the demand for domestic assets to shift to the and the domestic currency to appreciate, everything else held constant.

in the expected future domestic exchange rate causes the demand for domestic assets to shift to the left and the domestic currency to , everything else held constant.

If, in retaliation for "unfair" trade practices, the Canadian government imposes a 30 percent tariff on Japanese TV's, but at the same time, Canadian demand for Japanese goods increases, then, in the long run, ________, everything else held constant.

in the foreign interest rate causes the demand for domestic assets to shift to the and the domestic currency to depreciate, everything else held constant.

The Brexit vote in June 2016 resulted in higher expected trade barriers. The relative expected return on British (pound) assets therefore and so the quantity demanded of pound assets at any given exchange rate, shifting the demand curve for pound assets to the .

The theory of asset demand suggests that the most important factor affecting the demand for domestic and foreign assets is the ________ on these assets relative to one another.

in the domestic interest rate causes the demand for domestic assets to increase and the domestic currency to , everything else held constant.

in the expected future domestic exchange rate causes the demand for domestic assets to decrease and the domestic currency to , everything else held constant.

The theory of purchasing power parity states that exchange rates between any two currencies will adjust to reflect changes in ________.

An increase in the foreign interest rate causes the demand for domestic assets to shift to the and the domestic currency to , everything else held constant.

in the expected future domestic exchange rate causes the demand for domestic assets to and the domestic currency to appreciate, everything else held constant.

If the Canadian dollar appreciates from 1.25 Swiss franc per Canadian dollar to 1.5 francs per dollar, then the franc depreciates from Canadian dollars per franc to Canadian dollars per franc.

Exchange rates are determined in ________.

A decrease in the domestic interest rate causes the demand for domestic assets to shift to the and the domestic currency to , everything else held constant.

Higher tariffs and quotas cause a country's currency to in the run, everything else held constant.

An increase in the expected future domestic exchange rate causes the demand for domestic assets to and the domestic currency to , everything else held constant.

When Canadians or foreigners expect the return on dollar assets to be high relative to the return on foreign assets, there is a demand for dollar assets and a correspondingly demand for foreign assets.

When Canadians or foreigners expect the return on assets to be high relative to the return on assets, there is a higher demand for dollar assets and a correspondingly lower demand for foreign assets.

Everything else held constant, if a factor decreases the demand for goods relative to goods, the domestic currency will depreciate.